Why Mandating Higher Quality is Regressive

Lately, a lot of attention has been given to the fact that millions of Americans are seeing their health insurance plans cancelled as a result of the Patient Protection and Affordable Care Act (aka Obamacare). Some pundits have gone so far as to argue this is a good thing. The cancelled plans, the logic goes, were lower in quality than the plans being offered in the new government health insurance exchanges. Many people will end up paying more for the replacement plans, but since the new plans cover a wider variety of health services, they are better off, right?

Actually, no. Imagine if the same logic were applied to automobiles. I drive a 2003 Toyota Matrix. Would I be better off if my current model was banned and I was forced to buy a brand new Ferrari instead? The President made a similar comparison in a recent press conference when he said:

We made a decision as a society that every car has to have a seat belt or air bags. And so you pass a regulation. And there’s some additional cost, particularly at the start, of increasing the safety and protections, but we make a decision as a society that the costs are outweighed by the benefits of all the lives that are saved. So what we’re saying now is if you’re buying a new car, you got to have a seat belt.

If the President’s comparison were appropriate, people would be able to keep their current plans, and might only have to add a new feature or two when they buy a new plan. Instead, people are being dumped from their current coverage and forced into the government run exchanges where they are being forced to buy all kinds of options they don’t want or need. Some might get a subsidy to help with the purchase, but this is still like forcing everyone to buy a Ferrari when all they really want is their trusty old Honda Accord.

Sure, if I had to buy a new Ferrari, it might have all kinds of amazing features that my current car lacks. But I would also have a lot less money to spend on other things that I value a lot more, like my monthly gym membership, or taking my girlfriend out to a nice restaurant on occasion. If banning low quality goods and services is so good for consumers, why not extend this logic even further? Why not ban row boats and force people to buy yachts instead? Imagine how much better dressed Americans would be if we banned all of the clothes sold at Target and Walmart and only allowed people to purchase Christian Dior or Armani!

The problem with this logic is that quality is what economists call a “normal” good. A normal good is something people demand more of when their income rises. By contrast, an “inferior” good is something we demand more of when our income falls. Think macaroni and cheese dinners or sneakers from Payless, for example.

There’s nothing inherently “inferior” about an inferior good. Rather, people with lower incomes often prefer to trade off quality in exchange for a lower price. This is a perfectly rational decision. Since people demand more quality as income rises, banning lower quality products, like catastrophic only health insurance coverage, is actually banning the products that lower income people prefer. And it’s not just the poor who make tradeoffs between price and quality. (For example, I know for a fact that one of my more senior colleagues at the Mercatus Center buys most of his clothes at Walmart!). When prices rise in response to the mandated improvement in quality, the preferences of the poor are ignored and their options limited. As such, each individual must decide for him or herself what the right balance is between quality and price.

Once this becomes clear, one has to wonder who a lot of regulations are really designed to serve. For example, the FDA recently announced it will be setting standards for the production of pet food. Are regulations like this designed to cater to the preferences of the poor, who probably opt for the 79 cent can of cat food? Or are they more in line with the preferences of people who already buy organic food for their cats, people who might not mind paying a little extra to ensure that their pet food has met the new standards set by the FDA?

Mandating rearview cameras in automobiles is regressive for the same reason. This item was originally found mostly in luxury cars, but, thanks to market innovation, these cameras are rapidly becoming commonplace features in cars, all without government regulation.

One of the benefits of the market system is that when a new product is first introduced, the wealthy often pay a lot for it. Over time, the kinks in the product are worked out, and prices fall as the new technology becomes more affordable. Eventually, low income people can afford the product as well, but each consumer must decide for herself when the price has fallen sufficiently to make the purchase worthwhile.

Banning low quality items may seem like a noble way to protect consumers, but not when that removes lower-priced options for those consumers who have the fewest resources to spare. Rather than forcing consumers to buy luxury items, regulatory agencies should respect consumer preferences, especially the preferences of the poor.

6 thoughts on “Why Mandating Higher Quality is Regressive

  1. jedifinance

    The problem with all these car feature analogies is that the original pitch was the noble pursuit of putting 30 million more people into very nice cars for the first time and at less cost. The current pitch is out of a desperate explanation on why our paid-off cars are being towed out of our driveways… somehow they were substandard and a few new features are worth losing our ride? None of this makes any sense if the real purpose was equipping more Americans in need of transportation.

    1. jedifinance

      And… as this ill-conceived scheme would have it, we taxpayers are even paying for the tow. This has little to do with new features. This is more clunker control on the way to bicycles and LNG bus pooling.

  2. CVASN

    This is as lame an analogy as I have ever seen. The writer would be laughed off the stage if he were to propose such nonsense in a debate.

    1. Humanity is NOT government

      Is it really that lame? What would your debate points be? Easy to post “hate it”. I think there are some very valid points. Consider the ever expanding black markets that always pop up when our dear leaders get to involved into the actually economy that they can’t paper over (pun intended). Everyone chooses their own preference of quality and quantity of anything, even in the face of the intervention. And as for you “laughed off the stage” reference, where do you think you are? This IS the stage. Please tell me where YOU think the proper stage is located to address these types of issues. LMAO

    2. Logic Hurts

      Dear Sir,

      I think you may have skipped over the part where Obama said this “We made a decision as a society that every car has to have a seat belt or air bags. And so you pass a regulation. And there’s some additional cost, particularly at the start, of increasing the safety and protections, but we make a decision as a society that the costs are outweighed by the benefits of all the lives that are saved. So what we’re saying now is if you’re buying a new car, you got to have a seat belt.”

      If only he would be laughed out of his Presidency.

      Sincerely,

      I read the entire article.

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